o BT PYRAMID MUTUAL FUNDS O
BT INSTITUTIONAL ASSET MANAGEMENT FUND
An asset allocation fund that seeks high total return over the long term,
as well as reduced investment risk, through investment in stocks, bonds and
short-term instruments.
PROSPECTUS
June 30, 1997
BT Pyramid Mutual Funds (the `Trust'') is an open-end, management
investment company (mutual fund) which consists of a number of separate
investment funds.
Please read this Prospectus carefully before investing and retain it for
future reference. It contains important information about BT Institutional
Asset Management Fund (the `Fund'') that you should know and can refer to
in deciding whether the Fund's goals match your own.
A Statement of Additional Information (`SAI'') with the same date has been
filed with the Securities and Exchange Commission ("SEC"), and is
incorporated herein by reference. You may request a free copy of the SAI by
calling the Fund's Service Agent at 1-800-368-4031.
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT
OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS (`ASSETS'') IN THE
ASSET MANAGEMENT PORTFOLIO (THE `PORTFOLIO''), A SEPARATE INVESTMENT
COMPANY WITH AN IDENTICAL INVESTMENT OBJECTIVE. THE INVESTMENT PERFORMANCE
OF THE FUND WILL CORRESPOND DIRECTLY TO THE INVESTMENT PERFORMANCE OF THE
PORTFOLIO. SEE "SPECIAL INFORMATION CONCERNING MASTER FEEDER FUND
STRUCTURE" HEREIN.
BANKERS TRUST COMPANY (`BANKERS TRUST'') IS THE INVESTMENT ADVISER (THE
`ADVISER'') OF THE PORTFOLIO. SHARES OF THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER
BANKING OR DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EDGEWOOD SERVICES, INC.
Clearing Operations P.O. Box 897 Pittsburgh, Pennsylvania 15230-0897
TABLE OF CONTENTS
The Fund 3
Who May Invest 3
Summary of Fund Expenses 4
Financial Highlights 5
Investment Objective and Policies 5
Risk Factors: Matching the Fund to Your Investment Needs 8
Net Asset Value 11
Purchase and Redemption of Shares 12
Dividends, Distributions and Taxes 16
Performance Information and Reports 17
Management of the Trust and Portfolio 18
Additional Information 22
THE FUND
The Fund's investment objective is to seek high total return with reduced
risk over the long term by allocating investments among stocks, bonds, and
short-term instruments. The Fund offers investors a convenient means of
diversifying their holdings in various classes of assets while relieving
those investors of the administrative burdens typically associated with
purchasing and holding these instruments, such as coordinating maturities
and reinvestments, providing for safekeeping and maintaining detailed
records.
The Trust seeks to achieve the investment objective of the Fund by
investing all of the Assets of the Fund in the Portfolio, which has the
same investment objective as the Fund.
WHO MAY INVEST
The Fund is designed for investors seeking high total returns from a
variety of investments selected at the discretion of the Portfolio's
Adviser, yet subject to parameters that generally limit risk and exposure
to one asset class.
By itself, the Fund does not constitute a balanced investment plan,
although it may form one component of a well-rounded portfolio. The Fund's
share price, yield and total return fluctuate and your investment may be
worth more or less than your original cost when you redeem your shares.
SUMMARY OF FUND EXPENSES
The following table provides (i) a summary of expenses relating to
purchases and sales of the shares of the Fund, and the annual operating
expenses of the Fund and the Portfolio, as a percentage of average net
assets of the Fund; and (ii) an example illustrating the dollar cost of
such expenses on a $1,000 investment in the Fund.
THE TRUSTEES OF THE TRUST BELIEVE THAT THE AGGREGATE PER SHARE EXPENSES OF
THE FUND AND THE PORTFOLIO WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE
EXPENSES WHICH THE FUND WOULD INCUR IF THE TRUST RETAINED THE SERVICES OF
AN INVESTMENT ADVISER AND THE ASSETS OF THE FUND WERE INVESTED DIRECTLY IN
THE TYPE OF SECURITIES BEING HELD BY THE PORTFOLIO.
Annual Operating Expenses
(as a percentage of the average daily net assets of the Fund)
Investment advisory fee (after waiver) 0.39%
12b-1 fees 0.00
Other expenses (after reimbursements or waivers) 0.21
Total operating expenses (after reimbursements or waivers) 0.60%
Example 1 Year3 Years5 Years10 Years
You would pay the following expenses for each Fund on a $1,000
investment, assuming (1) 5% annual return and (2) redemption
at the end of each time period $6 $19 $33 $75
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund.
While reimbursement of distribution expenses in amounts up to 0.20% of
average net assets are authorized to be made pursuant to the Distribution
and Service Plan under Rule 12b-1 of the Investment Company Act of 1940, as
amended (the "1940 Act"), it is not expected that any payments will
actually be made under that plan in the foreseeable future. If the plan
were activated, long-term shareholder's may pay more 12b-1 fees than the
economic equivalent of the maximum front-end sales charge permitted under
the rules of the National Association of Securities Dealers, Inc. Bankers
Trust has voluntarily agreed to waive a portion of its investment advisory
fee with respect to the Portfolio. Without such waivers, the Portfolio's
investment advisory fee would have been equal to 0.65% of the Portfolio's
average daily net assets. The expense table and the example reflect a
voluntary undertaking by Bankers Trust to waive or reimburse expenses such
that the total operating expenses of the Portfolio and the Fund will not
exceed 0.60% of the Fund's average net assets. In the absence of this
undertaking, for the fiscal year ended March 31, 1997 "Total operating
expenses" above would have been equal to approximately 0.96% of the Fund's
average net assets. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. Moreover, while each example assumes a 5% annual return,
actual performance will vary and may result in a return greater or less
than 5%.
The Fund is distributed by Edgewood Services, Inc. (`Edgewood'' or the
`Distributor'') to investors including customers of Bankers Trust or to
customers of another bank or a dealer or other institution that has a sub-
shareholder servicing agreement with Bankers Trust (along with Bankers
Trust, a "Service Agent"). Some Service Agents may impose certain
conditions on their customers in addition to or different from those
imposed by the Fund and may charge their customers a direct fee for their
services. Each Service Agent has agreed to transmit to shareholders, who
are its customers, appropriate disclosures of any fees that it may charge
them directly.
For more information with respect to the expenses of the Fund and the
Portfolio see "Management of the Trust and Portfolio" herein.
FINANCIAL HIGHLIGHTS
The following table shows selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data
of the Fund for the periods indicated and have been audited by Coopers &
Lybrand L.L.P., the Fund's independent accountants, whose report thereon
appears in the Fund's Annual Report which is incorporated by reference in
the Fund's SAI.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED SEPTEMBER 16, 1993
MARCH 31, (COMMENCEMENT
--
- ----------------------------------- - OF OPERATIONS) TO
1997 1996 1995 MARCH 31, 1994
- -------- -------- -------- ------------------
<S>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PE . . . . . . . . . . . $ 11.25 $
9.99 $ 9.61 $ 10.00
- -------- -------- -------- --------
Income from Investment Operations
Net Investment Income . . . . . . . . . . . . . . . . . . . .
. . 0.38 0.41 0.36 0.11
Net Realized and Unrealized Gain (Loss) on Investments,
Foreign Currencies and Futures Contracts . . . . . . . . . . . .
1.19 1.52 0.30 (0.44)
- -------- -------- -------- --------
Total Income (Loss) from Investment Operations . . . . . . . . . . .
1.57 1.93 0.66 (0.33)
- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income . . . . . . . . . . . . . . . . .
. . . . (0.45) (0.42) (0.28) (0.06)
Net Realized Gain from Investment Transactions . . . . . . . . . .
(0.32) (0.25) -- --
- -------- -------- -------- --------
Total Distributions . . . . . . . . . . . . . . . . . . . . .
. (0.77) (0.67) (0.28) (0.06)
- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . .
$12.05 $11.25 $9.99 $9.61
- -------- -------- -------- --------
- -------- -------- -------- --------
TOTAL INVESTMENT RETURN . . . . . . . . . . . . . . . . . . . . . .
14.31% 19.77% 7.13% (6.06)%*
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) . . . . . . . . . . . . .
$270,315 $183,767 $ 83,201 $75,021
Ratios to Average Net Assets:
Net Investment Income . . . . . . . . . . . . . . . . . . .
. 3.12% 3.99% 3.78% 2.83%*
Expenses, including Expenses of the Asset
Management Portfolio . . . . . . . . . . . . . . . . . .
. 0.60% 0.60% 0.60% 0.60%*
Decrease Reflected in Above Expense Ratio Due to
Absorption of Expenses by Bankers Trust. . . . . . . . . . . .
0.36% 0.39% 0.43% 0.73%*
</TABLE>
- - -----------------------
* Annualized
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated March 31, 1997, which can be obtained free of charge.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high total return with reduced risk over the long term by
allocating investments among stocks, bonds, and short-term instruments. The
Fund offers investors a convenient means of diversifying their holdings in
various classes of assets while relieving those investors of the
administrative burdens typically associated with purchasing and holding
these instruments, such as coordinating maturities and reinvestments,
providing for safekeeping and maintaining detailed records.
The Trust seeks to achieve the investment objective of the Fund by
investing all the Assets of the Fund in the Portfolio, which has the same
investment objective as the Fund. There can be no assurances that the
investment objective of either the Fund or the Portfolio will be achieved.
The investment objective of the Fund and the Portfolio is not a fundamental
policy and may be changed upon notice to, but without the approval of, the
Fund's shareholders or the Portfolio's investors, respectively. See
"Special Information Concerning Master Feeder Fund Structure" herein.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments and investment policies of the Portfolio. Additional
information about the investment policies of the Portfolio appears in the
SAI.
ASSET MANAGEMENT PORTFOLIO
Investment Allocations. In seeking to achieve the Portfolio's investment
objective the Adviser allocates the Portfolio's assets among three
principal asset classes (as discussed below): stocks, bonds and short-term
instruments. The asset classes are based on risk characteristics and may
not be identical to the Portfolio's total aggregate holdings of the three
types of instruments. For example, the Portfolio may buy or sell a futures
contract to increase or decrease the Portfolio's exposure to the stock
market. Bankers Trust will normally allocate the Portfolio's assets among
the asset classes within the following parameters: 0-25% in short-term
instruments; 25-55% in bonds (intermediate to long term debt securities);
and 40%-70% in stocks (equities). The asset classes of the Portfolio
fluctuate around a neutral position of 10% in short-term instruments, 35%
in bonds and 55% in stocks. As of March 31, 1997, the Portfolio's asset
classes were allocated as follows: short-term instruments 30%; bonds 17%;
and stocks 53%.
The Portfolio may make substantial temporary investments in cash and money
market instruments for defensive purposes when, in Bankers Trust's
judgment, market conditions warrant.
Bankers Trust regularly reviews the Portfolio's investment allocations, and
will gradually vary them over time to favor asset classes that, in Bankers
Trust's current judgment, provide the most favorable total return outlook.
In making allocation decisions, Bankers Trust will evaluate projections of
risk, market and economic conditions, volatility, yields and expected
return. Bankers Trust will seek to reduce risk relative to an investment in
common stocks by emphasizing the bond and short-term classes when stocks
appear overvalued. Bankers Trust's management will include use of database
systems to help analyze past situations and trends, research specialists in
each of the asset classes to help in securities selection, portfolio
management professionals to determine asset allocation and to select
individual securities, and its own credit analysis as well as credit
analysis provided by rating services to determine the quality of debt
securities.
Short-Term Instruments. These securities include all types of domestic and
foreign securities and money market instruments with remaining maturities
of thirteen months or less. Bankers Trust will seek to maximize total
return within the short-term class by taking advantage of yield
differentials between different instruments, issuers and currencies. Short-
term instruments may include foreign and domestic: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt
securities rated Aa or higher by Moody's Investors Service, Inc.
("Moody's") or AA or higher by Standard & Poor's ("S&P") or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper;
(iv) bank obligations, including negotiable certificates of deposit, time
deposits and bankers' acceptances; and (v) repurchase agreements. At the
time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or
outstanding commercial paper or bank obligations rated Prime 1 by Moody's
or A 1 by S&P; or, if no such ratings are available, the instrument must be
of comparable quality in the opinion of Bankers Trust. These instruments
may be denominated in U.S. dollars or foreign currencies and will have been
determined to be of high quality by a nationally recognized statistical
rating organization ("NRSRO") or, if unrated, by Bankers Trust.
Bonds. These securities include investment grade domestic and foreign fixed
income securities with remaining maturities or durations greater than
thirteen months. Bankers Trust seeks to maximize total returns within the
bond class by adjusting the Portfolio's investments in securities with
different credit qualities, maturities, and coupon or dividend rates, as
well as by exploiting yield differentials between securities. Securities in
this class may include bonds, notes, adjustable rate preferred stocks,
convertible bonds, mortgage related and asset backed securities, domestic
and foreign government and government agency securities, zero coupon bonds,
Rule 144A securities and other intermediate and long term securities. As
with the short-term class, these securities may be denominated in U.S.
dollars or foreign currency. No more than 5% of the Portfolio's net assets
(at the time of investment) may be in lower rated (BB/Ba or lower), high
yield bonds. The Portfolio may retain any bond whose rating drops below
investment grade if it is in the best interest of the Fund's shareholders.
Securities rated BB/Ba by a NRSRO are considered to have speculative
characteristics. See the Appendix to the SAI for further information on
these securities.
Stocks. These securities include domestic and foreign equity securities of
all types (other than adjustable rate preferred stocks included in the bond
class). Bankers Trust seeks to maximize total return within this asset
class by actively allocating assets to industry sectors expected to benefit
from major trends, and to individual stocks that it believes to have
superior investment potential. Securities in the stock class may include
common stocks, fixed rate preferred stocks (including convertible preferred
stocks), warrants, rights, depositary receipts, securities of closed end
investment companies, and other equity securities issued by companies of
any size, located anywhere in the world.
Bankers Trust believes that diversification of the Portfolio's investments
among the asset classes will, under most market conditions, better enable
the Portfolio to reduce risk while seeking high total return over the long
term.
Maturity and Duration. The remaining maturity of a fixed income instrument
is the amount of time left before the bond's principal is due. The duration
of an instrument or a group of instruments measures the instrument's or
group of instruments' value's expected response to changes in interest
rates.
Foreign Investments and Currency Management. The Portfolio focuses on U.S.
investment opportunities, but may invest a portion of its assets in foreign
securities. The Portfolio will not invest more than 25% of its total assets
in equity securities of foreign issuers under normal conditions. The
Portfolio also will not invest more than 25% of its total assets in each of
the bond and short-term classes in foreign securities and securities
denominated in foreign currencies. Foreign securities of all types will
normally constitute less than 50% of the Portfolio's assets.
In connection with the Portfolio's investments denominated in foreign
currencies, Bankers Trust may choose to utilize a variety of currency
management strategies. Bankers Trust seeks to take advantage of different
yield, risk, and return characteristics that different currencies, currency
denominations, and countries can provide to U.S. investors. In doing so,
Bankers Trust will consider such factors as the outlook for currency
relationships, current and anticipated interest rates, levels of inflation
within various countries, prospects for relative economic growth, and
government policies influencing currency exchange rates and business
conditions.
To manage exposure to currency fluctuations, the Portfolio may enter into
forward currency exchange contracts (agreements to exchange one currency
for another at a future date), may buy and sell options and futures
contracts relating to foreign currencies, and may purchase securities
indexed to foreign currencies. The Portfolio will use currency exchange
contracts in the normal course of business to lock in an exchange rate in
connection with purchases and sales of securities denominated in foreign
currencies. Other currency management strategies allow Bankers Trust to
hedge portfolio securities, to shift investment exposure from one currency
to another, or to attempt to profit from anticipated declines in the value
of a foreign currency relative to the U.S. dollar. Some of these strategies
will require the Portfolio to segregate liquid assets in a custodial
account to cover its obligations. For additional information on foreign
investments and currency management, see "Additional Information" herein
and in the SAI.
Options and Futures Contracts. The Portfolio may buy and sell options and
futures contracts to manage its exposure to changing interest rates,
security prices and currency exchange rates, and as an efficient means of
managing allocations between asset classes. The Portfolio may invest in
options and futures based on any type of security or index related to the
Portfolio's investments, including options and futures traded on foreign
exchanges.
Some options and futures strategies, including selling futures, buying
puts, and writing calls, hedge the Portfolio's investments against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase market exposure. Options and futures may be
combined with each other, or with forward contracts, in order to adjust the
risk and return characteristics of an overall strategy. See "Additional
Information" herein for further information on options on stocks, options
and futures contracts on stock indices, options on futures contracts,
foreign currency exchange transactions, and options on foreign currencies.
Investment Company Securities. Securities of other investment companies may
be acquired by the Portfolio to the extent permitted under the 1940 Act,
that is, the Portfolio may invest a maximum of up to 10% of its total
assets in securities of other investment companies so long as not more than
3% of the total outstanding voting stock of any one investment company is
held by the Portfolio. In addition, not more than 5% of the Portfolio's
total assets may be invested in the securities of any one investment
company. The Portfolio may be permitted to exceed these limitations by an
exemptive order of the SEC. It should be noted that investment companies
incur certain expenses such as management, custodian, and transfer agency
fees, and, therefore, any investment by the Portfolio in shares of other
investment companies would be subject to such duplicate expenses.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Portfolio may also utilize the following investments and investment
techniques and practices: when issued and delayed delivery securities,
short sales, indexed securities, securities lending, repurchase agreements,
Rule 144A securities, zero coupon debt securities, government securities,
mortgage backed securities, collateralized mortgage obligations, asset
backed securities and foreign investments. See "Additional Information"
herein for further information.
ADDITIONAL INVESTMENT LIMITATIONS
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. government
securities), except that up to 25% of the Portfolio's assets may be
invested without regard to this limitation. The Portfolio will not invest
more than 25% of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of the Portfolio which
may not be changed without investor approval. No more than 15% of the
Portfolio's net assets may be invested in illiquid or not readily
marketable securities (including repurchase agreements and time deposits
maturing in more than seven calendar days). Additional investment policies
of the Portfolio are contained in the SAI.
RISK FACTORS: MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
The Fund is designed for investors seeking high total returns from a
variety of investments selected at the discretion of the Portfolio's
Adviser, yet subject to parameters that generally limit risk and exposure
to any one asset class. The Fund is designed for investors who seek to
diversify their investments among short-term instruments, bonds and stocks
as economic conditions change. The Fund may also be appropriate for
investors who wish to moderate risks over time by taking advantage of the
asset class with the best relative value. The Portfolio allocates its
investments within the parameters described in "Investment Objective,
Policies and Risks" herein. Since the Portfolio's asset allocation involves
significant investment in short-term instruments and bonds over time, it is
expected that the Portfolio will be less volatile than a fund that invests
primarily in common stocks. By itself, the Fund does not constitute a
balanced investment plan, although it may form one component of a well
rounded portfolio. The Fund's share price, yield and total return fluctuate
and your investment may be worth more or less than your original cost when
you redeem your shares.
The Fund's performance may be affected by many different factors depending
on the Portfolio's emphasis. Short-term instruments are generally the most
stable securities in which the Portfolio will invest. Their returns depend
primarily on current short-term interest rates although currency
fluctuations can also be significant with respect to short-term foreign
securities.
The bond class is affected primarily by interest rates: prices of fixed
income securities tend to rise when interest rates fall, and fall when
interest rates rise. Interest rate changes will have a greater impact on
the Portfolio if it is heavily invested in long term or zero coupon bonds.
Fixed income securities may also be affected by changes in credit quality.
The stock class is subject to the risks of stock market investing,
including the possibility of sudden or prolonged market declines as well as
the risks associated with individual companies. These risks may be
intensified for investments in smaller or less well known companies or in
foreign securities.
RISKS OF INVESTING IN FOREIGN SECURITIES
The investment in foreign securities may involve additional risks. Foreign
securities usually are denominated in foreign currencies, which means their
value will be affected by changes in the strength of foreign currencies
relative to the U.S. dollar as well as the other factors that affect
security prices. Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S. companies, and
there often is less publicly available information about their operations.
Generally, there is less governmental regulation of foreign securities
markets, and security trading practices abroad may offer less protection to
investors such as the Portfolio. The value of such investments may be
adversely affected by changes in political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition of (or change
in) exchange control or tax regulations in those foreign countries. Foreign
securities may be less liquid or more volatile than domestic investments.
Bankers Trust considers these factors in making investments for the
Portfolio and limits the amount of the Portfolio's assets that may be
invested in foreign securities to 25% of its total assets for each asset
class and to less than 50% for all classes under normal conditions.
However, within the Portfolio's limitations, investments in any one country
or currency are not restricted.
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known as
`derivatives.'' Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security,
asset or market index. Some "derivatives" such as mortgage related and
other asset backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. The Portfolio may use futures and options for
traditional hedging purposes to attempt to protect the Portfolio from
exposure to changing interest rates, securities prices or currency exchange
rates and for cash management or other investment purposes as a low cost
method of gaining exposure to a particular securities market without
investing directly in those securities. The use of derivatives may result
in some leverage. The Portfolio will limit the leverage created by its use
of derivatives for investment purposes by "covering" such positions as
required by the SEC. The Adviser will use derivatives only in circumstances
where the Adviser believes they offer the most economical means of
improving the risk/reward profile of the Portfolio. Derivatives will not be
used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio. The use of derivatives for non hedging
purposes may be considered speculative. A description of the derivatives
that the Portfolio may use and some of their associated risks is found
under "Additional Information" herein.
The Portfolio's investments in options, futures or forward contracts, and
similar strategies depend on Bankers Trust's judgment as to the potential
risks and rewards of different types of strategies. Options and futures can
be volatile investments, and may not perform as expected. If Bankers Trust
applies a hedge at an inappropriate time or judges price trends
incorrectly, options and futures strategies may lower the Portfolio's
return. Options and futures traded on foreign exchanges generally are not
regulated by U.S. authorities, and may offer less liquidity and less
protection to the Portfolio in the event of default by the other party to
the contract. The Portfolio could also experience losses if the prices of
its options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an
illiquid secondary market.
Further descriptions of a number of investments and investment techniques
available to the Portfolio, including foreign investments and the use of
options and futures and other investment techniques which may be considered
"derivatives," and certain risks associated with these investments and
techniques are included under "Additional Information" herein.
PORTFOLIO TURNOVER
The frequency of portfolio transactions -- the Portfolio's turnover rate --
will vary from year to year depending on market conditions. The Portfolio's
portfolio turnover rates for the fiscal years ended March 31, 1997 and
1996, were 137%, and 154%, respectively. Because a higher turnover rate
increases transaction costs and may increase taxable capital gains, Bankers
Trust carefully weighs the anticipated benefits of short-term investment
against these consequences.
SPECIAL INFORMATION CONCERNING MASTER FEEDER FUND STRUCTURE
Unlike other open end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same
investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect. In addition to selling a beneficial
interest to the Fund, the Portfolio may sell beneficial interests to other
mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate
share of the Portfolio's expenses. However, the other investors investing
in the Portfolio are not required to sell their shares at the same public
offering price as the Fund due to variations in sales commissions and other
operating expenses. Therefore, investors in the Fund should be aware that
these differences may result in differences in returns experienced by
investors in the different funds that invest in the Portfolio. Such
differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is
available by contacting Bankers Trust at 1-800-368-4031.
The master feeder structure is relatively complex, so shareholders should
carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns
(however, this possibility exists as well for traditionally structured
funds which have large institutional investors). Additionally, the
Portfolio may become less diverse, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Whenever the
Trust is requested to vote on matters pertaining to the Portfolio, the
Trust will, except as permitted by the SEC, hold a meeting of shareholders
of the Fund and will cast all of its votes in the same proportion as the
votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of
the Trust's votes representing Fund shareholders not voting will be voted
by the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to
withdraw its interest in the Portfolio. Any such withdrawal could result in
a distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund
could incur brokerage, tax or other charges in converting the securities to
cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests
of the shareholders of the Fund to do so. Upon any such withdrawal, the
Board of Trustees of the Trust would consider what action might be taken,
including the investment of all the assets of the Fund in another pooled
investment entity having the same investment objectives as the Fund or the
retaining of an investment adviser to manage the Fund's assets in
accordance with the investment policies described below with respect to the
Portfolio.
The Fund's investment objective is not a fundamental policy and may be
changed upon notice to, but without the approval of, the Fund's
shareholders. If there is a change in the Fund's investment objective, the
Fund's shareholders should consider whether the Fund remains an appropriate
investment in light of their then current needs. The investment objective
of the Portfolio is also not a fundamental policy. Shareholders of the Fund
will receive 30 days prior written notice with respect to any change in the
investment objective of the Fund or the Portfolio. See "Investment
Objective and Policies " herein and in the SAI for a description of the
fundamental policies of the Portfolio that cannot be changed without
approval by the holders of "a majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see "Investment Objective and Policies" herein and in the
SAI. For descriptions of the management and expenses of the Portfolio, see
"Management of the Trust and Portfolio" herein and in the SAI.
NET ASSET VALUE
The net asset value (`NAV'') per share of the Fund is calculated on each
day on which the New York Stock Exchange Inc. (the "NYSE") is open (each
such day being a "Valuation Day"). The NYSE is currently open on each day,
Monday through Friday, except (a) January 1st, Presidents' Day (the third
Monday in February), Good Friday, Memorial Day (the last Monday in May),
July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the
last Thursday in November) and December 25th; and (b) the preceding Friday
or the subsequent Monday when one of the calendar determined holidays falls
on a Saturday or Sunday, respectively.
The NAV per share of the Fund is calculated once on each Valuation Day as
of the close of regular trading on the NYSE which is currently 4:00 p.m.,
New York time or in the event that the NYSE closes early, at the time of
such early closing (the "Valuation Time"). The NAV per share of the Fund is
computed by dividing the value of the Fund's Assets (i.e., the value of its
investment in the Portfolio and other assets), less all liabilities, by the
total number of its shares outstanding. The Portfolio's securities and
other assets are valued primarily on the basis of market quotations or, if
quotations are not readily available, by a method which the Portfolio's
Board of Trustees believes accurately reflects fair value.
Under procedures adopted by the Board, a NAV for a Fund later determined to
have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at a NAV determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original net asset value and the recalculated net asset value
divided by the recalculated net asset value is 0.005 (1/2 of 1%) or less or
shareholder transactions are otherwise insubstantially affected, further
action is not required.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trust accepts purchase orders for shares of the Fund at the NAV per
share (and, if applicable, of the respective class of shares) next
determined after the order is received on each Valuation Day. See `Net
Asset Value''herein. Shares of the Fund may be available through
Investment Professionals, such as broker/dealers and investment advisers
(including Service Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the
`Transfer Agent''), prior to the Valuation Time on any Valuation Day will
be effective at that day's Valuation Time. The Trust and Transfer Agent
reserve the right to reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each
Service Agent to transmit to the Transfer Agent purchase and redemption
orders and to transmit to Bankers Trust as the Trust's custodian (the
`Custodian'') purchase payments by the following business day (trade date
+ 1) after an order for shares is placed. A shareholder must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the
Custodian and Transfer Agent of the Trust, funds may be transferred
directly from or to a customer's account held with Bankers Trust to settle
transactions with the Fund without incurring the additional costs or delays
associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account
will be maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before the Valuation Time.
The Transfer Agent must receive payment within one business day after an
order for shares is placed; otherwise, the purchase order may be canceled
and the investor could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $2,500
For retirement accounts 500
Through automatic investment plans 1,000
TO ADD TO AN ACCOUNT $250
For retirement accounts 100
Through automatic investment plan 100
MINIMUM BALANCE $1,000
For retirement accounts None
IF YOU ARE NEW TO BT PYRAMID MUTUAL FUNDS complete and sign an account
application and mail it along with your check to the address listed below.
If there is no account application accompanying this Prospectus, call the
BT Service Center at 1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you
can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an
IRA, for the first time, you will need a special application. Contact your
Investment Professional for more information and a retirement account
application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY WIRE Call the BT Service Center at Call your Investment Professional
or wire
1-800-368-4031 to receive additional investment to:
wire instructions for account
establishment.
ROUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: Fund Number
BT Institutional Asset Management Fund - 482
Specify the complete name of the Fund of your choice, and include your
account number and your name.
BY PHONE Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional,
or call
BT's Service Center at BT's Service Center at
1-800-368-4031. If you are an 1-800-368-4031. If you are an
existing shareholder, you may existing shareholder, you may
exchange from another BT account exchange from another BT
account
with the same registration, including, with the same
registration, including,
name, address, and taxpayer name, address, and taxpayer
ID number. ID number.
BY MAIL Complete and sign the account Make your check payable to the
application. Make your check complete name of the Fund of
your payable to the complete name of the
choice. Indicate your Fund account Fund of
your choice. Mail to the number on your check and mail to the
appropriate address indicated on the address printed on
your account statement. application.
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares. Your shares shall be sold
at the next NAV calculated after an order is received by the Transfer
Agent. Redemption requests should be transmitted by customers in accordance
with procedures established by the Transfer Agent and the Shareholder's
Service Agent. Redemption requests for shares of the Fund received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation
Time on each Valuation Day will be effective at that day's Valuation Time
and the redemption proceeds normally will be delivered to the shareholder's
account the next day, but in any event within seven calendar days following
receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may
disclaim liability for following instructions communicated by telephone
that the Service Agent reasonably believes to be genuine. The Service Agent
must provide the investor with an opportunity to choose whether or not to
utilize the telephone redemption or exchange privilege. The Transfer Agent
and the Service Agent must employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Shareholder
Servicing Agent does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
Redemption orders are processed without charge by the Trust. A Service
Agent may on at least 30 days' notice involuntarily redeem a shareholder's
account with the Fund having a balance below the minimum, but not if an
account is below the minimum due to a change in market value. See `Minimum
Investments''above for minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in
writing, except for exchanges to other eligible funds in the BT Family of
Funds, which can be requested by phone or in writing. For information on
retirement distributions, contact your Service Agent or call the BT Service
Center at 1-800-368-4031.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR NON-RETIREMENT ACCOUNT SHARES,
leave at least $1,000 worth of shares in the account to keep it open.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and
Bankers Trust from fraud. Redemption requests in writing must include a
signature guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account
owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated
bank information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify
that it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire
redemption request must be received by the Transfer Agent before 4:00 p.m.
Eastern time for money to be wired on the next business day.
IN WRITING - Write a signed `letter of instruction'' with your name, the
Fund's name and Fund's number, your Fund account number, the dollar amount
or number of shares to be redeemed, and mail to one of the following
addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide
a copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record. The Trust reserves the right to close investor
accounts via 30 day notice in writing if the Fund account balance falls
below the Fund minimums.
INVESTOR SERVICES
BT Pyramid Mutual Funds provide a variety of services to help you manage
your account.
INFORMATION SERVICES
STATEMENTS AND REPORTS that your Investment Professional or the Transfer
Agent may send to you include the following:
o Confirmation statements (after every transaction that affects your
account balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed,
even if you have more than one account in the Fund. Call your Investment
Professional or the BT Service Center at 1-800-368-4031 if you need
additional copies of financial reports.
EXCHANGE PRIVILEGE
Shareholders may exchange their shares for shares of certain other funds in
the BT Family of Funds registered in their state. The Fund reserves the
right to terminate or modify the exchange privilege in the future. To make
an exchange, follow the procedures indicated in `How to Buy Shares'' and
`How to Sell Shares'' herein. Before making an exchange, please note the
following:
o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.
o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number as
your existing account(s).
o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for tax
purposes. Your Service Agent will receive a written confirmation of each
exchange transaction.
Note that exchanges out of a Fund may be limited to four per calendar year
and that they may have tax consequences for you.
SYSTEMATIC PROGRAMS
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO BT PYRAMID MUTUAL FUNDS
MINIMUM MINIMUM FREQUENCY SETTING UP OR CHANGING
INITIAL SUBSEQUENT
$1,000 $100 Monthly, bimonthly, For a new account, complete
the quarterly or semi- appropriate section
annually on the application.
For existing accounts, call your
Investment Professional for an
application. To
change the amount or
frequency of your investment, contact
your Investment Professional directly or
call 1-800-368-4031. Call at least 10
business days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PROGRAM lets you set up periodic redemptions from
your account.
MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 Monthly, quarterly, To establish, call your Investment
Professional semi-annually or annually or call 1-
800-368-4031 after your account is open.
The accounts from which the withdrawals be
processed must have a minimum balance of $10,000.
TAX-SAVING RETIREMENT PLANS
Retirement plans offer significant tax savings and are available to
individuals, partnerships, small businesses, corporations, nonprofit
organizations and other institutions. Contact Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under a
number of several tax-savings or tax-deferred plans. Minimums may differ
from those listed elsewhere in this Prospectus.
o INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): personal savings plans that
offer tax advantages for individuals to set aside money for retirement
and allow new contributions of $2,000 per tax year.
O ROLLOVER IRAS: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified
retirement plans and transferred IRA accounts.
o SIMPLIFIED EMPLOYEE PENSION PLANS (SEP): a relatively easy and
inexpensive alternative to retirement planning for sole proprietors,
partnerships and corporations. Under a SEP, employers make tax- deductible
contributions to their own and to eligible employees' IRA accounts.
Employee contributions are available through a `Salary Deferral'' SEP
for businesses with fewer than 25 eligible employees.
o KEOGH PLANS: defined contribution plans available to individuals with
self-employed income and nonincorporated businesses such as sole
proprietors, professionals and partnerships. Contributions are tax-
deductible to the employer and earnings are tax-sheltered until
distribution.
o CORPORATE PROFIT-SHARING AND MONEY-PURCHASE PLANS: defined
contribution plans available to corporations to benefit their employees
by making contributions on their behalf and in some cases permitting
their employees to make contributions.
o 401(K) PROGRAMS: defined contribution plans available to corporations
allowing tax-deductible employer contributions and permitting employees
to contribute a percentage of their wages on a tax-deferred basis.
o 403(B) CUSTODIAN ACCOUNTS: defined contribution plans open to
employees of most non-profit organizations and educational institutions.
o DEFERRED BENEFIT PLANS: plan sponsors may invest all or part of their
pension assets in the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Distributions. The Fund distributes substantially all of its net investment
income and capital gains to shareholders each year. Income dividends are
distributed quarterly. In addition, the Fund will distribute net capital
gains, if any, at least annually and potentially semi-annually, if
required, to remain in compliance with the applicable tax regulations.
Unless a shareholder instructs the Trust to pay such dividends and
distributions in cash, they will be automatically reinvested in additional
shares of the Fund.
Federal Taxes. The Fund intends to qualify as a regulated investment
company, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"). Provided the Fund meets the requirements imposed by the Code and
distributes all of its income and gains, the Fund will not pay any Federal
income or excise taxes. The Portfolio will also not be required to pay any
Federal income or excise taxes.
Distributions from the Fund's income and short-term capital gains are taxed
as dividends, and long term capital gain distributions are taxed as long
term capital gains. The Fund's distributions are taxable when they are
paid, whether you take them in cash or reinvest them in additional shares.
Distributions declared in December and paid in January are taxable as if
paid on December 31. The Fund will send each shareholder a tax statement by
January 31 showing the tax status of the distributions received in the past
year.
Capital Gains. You may realize a capital gain or loss when you redeem
(sell) or exchange shares. Because the tax treatment also depends on your
purchase price and your personal tax position, you should keep your regular
account statements to use in determining your tax.
"Buying a Dividend." On the ex-date for a distribution from income and/or
capital gains, the Fund's share value is reduced by the amount of the
distribution. If you buy shares just before the ex-date ("buying a
dividend"), you will pay the full price for the shares and then receive a
portion of the price back as a taxable distribution.
Other Tax Information. In addition to Federal taxes, you may be subject to
state or local taxes on your investment, depending on the laws in your
area. Income received by the Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. You should consult with your own tax adviser concerning the
application of Federal, state and local taxes to your distributions from
the Fund.
PERFORMANCE INFORMATION AND REPORTS
The Fund's performance may be used from time to time in advertisements,
shareholder reports or other communications to shareholders or prospective
shareholders. Performance information may include the Fund's investment
results and/or comparisons of its investment results to the Lipper Flexible
Funds Average, S&P 500 Index, Salomon Broad Investment Grade Bond Index,
Salomon U.S. Dollar T-Bill Index and various unmanaged indices (or a
blended rate of several of such indices) or results of other mutual funds
or investment or savings vehicles. The Fund's investment results as used in
such communications will be calculated on a yield or total rate of return
basis in the manner set forth below. From time to time, fund rankings may
be quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line and Morningstar, Inc.
The Trust may provide period and average annualized "total return"
quotations for the Fund. The "total return" refers to the change in the
value of an investment in the Fund over a stated period based on any change
in net asset value per share and including the value of any shares
purchasable with any dividends or capital gains distributed during such
period. Period total return may be annualized. An average annual total
return is a hypothetical rate of return that, if achieved annually, would
have produced the same cumulative total return if performance had been
constant over the entire period. Average annual total return calculations
smooth out variations in performance; they are not the same as actual year-
by-year results. Average annual total returns covering periods of less than
one year assume that performance will remain constant for the rest of the
year.
The Trust may provide annualized "yield" quotations for the Fund. The
"yield" of the Fund refers to the income generated by an investment in the
Fund over a 30 day or one month period (which period shall be stated in any
such advertisement or communications). This income is then annualized; that
is, the amount generated by the investment over the period is assumed to be
generated over a one year period and is shown as a percentage of
investment.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending
upon interest rates, the current market value of the securities held by the
Portfolio and changes in the Fund's expenses. In addition, during certain
periods for which total return or yield quotations may be provided, Bankers
Trust, as Adviser, Service Agent or Administrator may have voluntarily
agreed to waive portions of its fees on a month to month basis. Such
waivers will have the effect of increasing the Fund's net income (and
therefore its total return or yield) during the period such waivers are in
effect.
Shareholders will receive financial reports semi annually that include the
Portfolio's financial statements, including listings of investment
securities held by the Portfolio at those dates. Annual reports are audited
by independent accountants.
MANAGEMENT OF THE TRUST AND PORTFOLIO
BOARD OF TRUSTEES
The affairs of the Trust and the Portfolio are managed under the
supervision of their respective Boards of Trustees. By virtue of the
responsibilities assumed by Bankers Trust, as the administrator of the
Trust and the Portfolio, neither the Trust nor the Portfolio requires
employees other than its officers. None of the Trust's or the Portfolio's
officers devotes full time to the affairs of the Trust or the Portfolio.
The Trustees of each of the Trust and the Portfolio who are not "interested
persons" (as defined in the 1940 Act) (the "Independent Trustees") of the
Trust or of the Portfolio, as the case may be, have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest, up to and including creating separate boards of trustees. For
more information with respect to the Trustees of both the Trust and the
Portfolio, see "Management of the Trust and Portfolio" in the SAI.
INVESTMENT ADVISER
The Trust has not retained the services of an investment adviser since the
Trust seeks to achieve the investment objective of the Fund by investing
all the Assets of the Fund in the Portfolio. The Portfolio has retained the
services of Bankers Trust, as investment adviser. Mr. Philip Green and Ms.
Karen Keller are responsible for the day to day management of the
Portfolio.
Mr. Green, Vice President, is a portfolio manager in the structured
products group. Mr. Green joined Bankers Trust in 1985 and has over
thirteen years of investment experience. During his career, Mr. Green has
held a wide variety of portfolio management assignments including asset
allocation portfolios, currency portfolios, and equity/bond structured
portfolios. He received his B.S.E. from the Wharton School of Business and
a M.B.A. from New York University. Mr. Green managed the Portfolio from
January, 1995, to July, 1996, and since March, 1997.
Ms. Keller, Vice President, is a portfolio manager for tactical asset
allocation portfolios. She also provides on going research for model
development and portfolio strategies. Ms. Keller joined Bankers Trust in
October, 1988 and has over eight years of investment experience.
Previously, she was a mutual fund accountant at State Street Bank and Trust
Company. She has a B.A. in Economics from Tufts University and an M.B.A. in
Finance from New York University. Ms. Keller has been overseeing the
management of the Portfolio since its inception in 1993.
Bankers Trust, a New York banking corporation with principal offices at 130
Liberty Street, New York, New York 10006, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services to the international and domestic institutional markets.
As of March 31, 1997, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $123 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 50 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers, with
approximately $233 billion in assets under management globally. Of that
total, approximately $4 billion are in tactical asset allocation funds.
This makes Bankers Trust one of the nation's leading managers of tactical
asset allocation funds.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise - once available to only the
largest institutions in the U.S. - to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios
having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who
provide research services to the Portfolio. Bankers Trust may utilize the
expertise of any of its worldwide subsidiaries and affiliates to assist it
in its role as investment adviser. All orders for investment transactions
on behalf of the Portfolio are placed by Bankers Trust with broker dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents or customers of Bankers Trust.
Under its Investment Advisory Agreement, Bankers Trust receives a fee from
the Portfolio computed daily and paid monthly at the annual rate of 0.65%
of the average daily net assets of the Portfolio.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolio described in this Prospectus and the SAI without violation of the
Glass Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretations of relevant Federal
law and banks and financial institutions may be required to register as
dealers pursuant to state securities law.
ADMINISTRATOR
Under its Administration and Services Agreement with the Trust, Bankers
Trust calculates the NAV of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of
the Trust. The Administration and Services Agreement provides for the Trust
to pay Bankers Trust a fee computed daily and paid monthly at the annual
rate of 0.15% of the average daily net assets of the Fund.
Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally
assists the Board of Trustees of the Portfolio in all aspects of the
administration and operation of the Portfolio. The Administration and
Services Agreement provides for the Portfolio to pay Bankers Trust a fee
computed daily and paid monthly at the annual rate of 0.10% of the average
daily net assets of the Portfolio. Under each Administration and Services
Agreement, Bankers Trust may delegate one or more of its responsibilities
to others, including Edgewood, at Bankers Trust's expense. For more
information, see the SAI.
For the fiscal year ended March 31, 1997, the Fund and the Portfolio, after
a partial waiver by Bankers Trust, paid Bankers Trust total administrative
and services fees equal to 0.15% of the average daily net assets of the
Fund.
DISTRIBUTOR
Edgewood Services, Inc. is the principal distributor for shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with
office facilities and currently provide administration and distribution
services for other registered investment companies. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
Pursuant to the terms of the Trust's Distribution and Service Plan pursuant
to Rule 12b 1 under the 1940 Act (the "Plan"), Edgewood, as Distributor,
may seek reimbursement in an amount not exceeding 0.20% of the Fund's
average daily net assets annually for expenses incurred in connection with
any activities primarily intended to result in the sale of the Fund's
shares, including, but not limited to: compensation to and expenses
(including overhead and telephone expenses) of account executives or other
employees of Edgewood who, as their primary activity, engage in or support
the distribution of shares; printing of prospectuses, statements of
additional information and reports for other than existing Fund
shareholders in amounts in excess of that typically used in connection with
the distribution of shares of the Fund; costs of placing advertising in
various media; services of parties other than Edgewood or its affiliates in
formulating sales literature; and typesetting, printing and distribution of
sales literature. All costs and expenses in connection with implementing
and operating the Plan will be paid by the Fund, subject to the 0.20% of
net assets limitation. All costs and expenses associated with preparing the
prospectus and SAI and in connection with printing them for and
distributing them to existing shareholders and regulatory authorities,
which costs and expenses would not be considered distribution expenses for
purposes of the Plan, will also be paid by the Fund. To the extent expenses
of Edgewood under the Plan in any fiscal year of the Trust exceed amounts
payable under the Plan during that year, those expenses will not be
reimbursed in any succeeding fiscal year. Expenses incurred in connection
with distribution activities will be identified to the Fund or the other
series of the Trust involved, although it is anticipated that some
activities may be conducted on a Trust wide basis, with the result that
those activities will not be identifiable to any particular series. In the
latter case, expenses will be allocated among the series of the Trust on
the basis of their relative net assets. It is not expected that any
payments will be made under the Plan in the foreseeable future.
SERVICE AGENT
All shareholders must be represented by a Service Agent. Bankers Trust acts
as a Service Agent pursuant to its Administration and Services Agreement
with the Trust and receives no additional compensation from the Fund for
such shareholder services. The service fees of any other Service Agents,
including broker dealers, will be paid by Bankers Trust from its fees. The
services provided by a Service Agent may include establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder sub
accounting, answering client inquiries regarding the Trust, assisting
clients in changing dividend options, account designations and addresses,
providing periodic statements showing the client's account balance,
transmitting proxy statements, periodic reports, updated prospectuses and
other communications to shareholders and, with respect to meetings of
shareholders, collecting, tabulating and forwarding to the Trust executed
proxies and obtaining such other information and performing such other
services as the Administrator or the Service Agent's clients may reasonably
request and agree upon with the Service Agent. Service Agents may
separately charge their clients additional fees only to cover provision of
additional or more comprehensive services not already provided under the
Administration and Services Agreement with Bankers Trust, or of the type or
scope not generally offered by a mutual fund, such as cash management
services or enhanced retirement or trust reporting. In addition, investors
may be charged a transaction fee if they effect transactions in Fund shares
through a broker or agent. Each Service Agent has agreed to transmit to
shareholders who are its customers appropriate disclosures of any fees that
it may charge them directly.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as Custodian of the assets of each of the Trust and the
Portfolio and serves as the Transfer Agent for each of the Trust and the
Portfolio under the Trust's Administration and Services Agreement with each
of the Trust and the Portfolio.
ORGANIZATION OF THE TRUST
The Trust was organized on February 28, 1992 under the laws of the
Commonwealth of Massachusetts. The Fund is a separate series of the Trust.
The Trust offers shares of beneficial interest of separate series, par
value $0.001 per share. The shares of the other series of the Trust are
offered through separate prospectuses. No series of shares has any
preference over any other series.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
When matters are submitted for shareholder vote, shareholders of the Fund
will have one vote for each full share held and proportionate, fractional
votes for fractional shares held. A separate vote of the Fund is required
on any matter affecting the Fund on which shareholders are entitled to
vote. Shareholders of the Fund are not entitled to vote on Trust matters
that do not affect the Fund. There normally will be no meetings of
shareholders for the purpose of electing Trustees unless and until such
time as less than a majority of Trustees holding office have been elected
by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be
removed from office upon the vote of shareholders holding at least two
thirds of the Trust's outstanding shares at a meeting called for that
purpose. The Trustees are required to call such a meeting upon the written
request of shareholders holding at least 10% of the Trust's outstanding
shares.
The Portfolio, in which all the Assets of the Fund will be invested, is
organized as a trust under the laws of the State of New York. The
Portfolio's Declaration of Trust provides that the Fund and other entities
investing in the Portfolio (e.g., other investment companies, insurance
company separate accounts and common and commingled trust funds) will each
be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the Portfolio.
Each series of the Trust will not be involved in any vote involving a
Portfolio in which it does not invest its Assets. Shareholders of all of
the series of the Trust will, however, vote together to elect Trustees of
the Trust and for certain other matters. Under certain circumstances, the
shareholders of one or more series could control the outcome of these
votes.
As of May 28, 1997, Bankers Trust Company as custodian for Kraft Thrift
Plan, Jersey City, New Jersey owned approximately 32.85% of the voting
securities of the Fund, and, therefor, may, for certain purposes, be deemed
to control the Fund and be able to affect the outcome of certain matters
presented for a vote of its shareholders.
EXPENSES OF THE TRUST
The Fund bears its own expenses. Operating expenses for the Fund generally
consist of all costs not specifically borne by Bankers Trust or Edgewood,
including administration and service fees, fees for necessary professional
services, amortization of organizational expenses, and costs associated
with regulatory compliance and maintaining legal existence and shareholder
relations. Bankers Trust has agreed to reimburse the Fund to the extent
required by applicable state law for certain expenses that are described in
the SAI. The Portfolio bears its own expenses. Operating expenses for the
Portfolio generally consist of all costs not specifically borne by Bankers
Trust or Edgewood, including investment advisory and administration and
services fees, fees for necessary professional services, the costs
associated with regulatory compliance and maintaining legal existence and
investor relations.
ADDITIONAL INFORMATION
When-Issued and Delayed Delivery Securities. The Portfolio may buy and sell
securities on a when-issued or delayed delivery basis. These transactions
involve a commitment by the Portfolio to buy or sell securities at a set
price, with payment and delivery taking place at a future date. Purchasing
securities in this manner may cause greater fluctuations in the Portfolio's
share price.
Short Sales. The Portfolio may engage in short sales with respect to
securities that it owns or has the right to obtain (for example, through
conversion of a convertible bond). These transactions, known as short sales
"against the box," allow the Portfolio to hedge against price fluctuations
by locking in a sale price for securities it does not wish to sell
immediately.
Indexed Securities. The Portfolio may invest in indexed securities whose
value depends on the price of foreign currencies, securities indices or
other financial values or statistics. Examples include debt securities
whose value at maturity is determined by reference to the relative prices
of various currencies or to the price of a stock index. These securities
may be positively or negatively indexed; that is, their value may increase
or decrease if the underlying instrument appreciates.
Securities Lending. The Portfolio is permitted to lend up to 30% of the
total value of its securities. These loans must be secured continuously by
cash or equivalent collateral or by a letter of credit at least equal to
the market value of the securities loaned plus accrued income. By lending
its securities, the Portfolio can increase its income by continuing to
receive income on the loaned securities as well as by the opportunity to
receive interest on the collateral. During the term of the loan the
Portfolio continues to bear the risk of fluctuations in the price of loaned
securities. In lending securities to brokers, dealers and other
organizations, the Portfolio is subject to risk which, like those
associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail
financially.
Repurchase Agreements. The Portfolio may invest in repurchase agreements.
In a repurchase agreement the Portfolio buys a security and simultaneously
agrees to sell it back at a higher price. In the event of the bankruptcy of
the other party to either a repurchase agreement or a securities loan, the
Portfolio could experience delays in recovering either its cash or the
securities it lent. To the extent that, in the meantime, the value of the
securities repurchased had decreased or the value of the securities lent
had increased, the Portfolio could experience a loss. In all cases, Bankers
Trust must find the creditworthiness of the other party to the transaction
satisfactory. A repurchase agreement is considered a collateralized loan
under the 1940 Act.
Rule 144A Securities. The Portfolio may purchase securities in the United
States that are not registered for sale under Federal securities laws but
which can be resold to institutions under the SEC's Rule 144A. Provided
that a dealer or institutional trading market in such securities exists,
these restricted securities are treated as exempt from the Portfolio's 15%
limit on illiquid securities. Under the supervision of the Board of
Trustees of the Portfolio, Bankers Trust determines the liquidity of
restricted securities and, through reports from Bankers Trust, the Board
will monitor trading activity in restricted securities. Because Rule 144A
is relatively new, it is not possible to predict how these markets will
develop. If institutional trading in restricted securities were to decline,
the liquidity of the Portfolio could be adversely affected.
Zero Coupon Debt Securities. Zero coupon debt securities do not make
regular interest payments. Instead they are sold at a deep discount from
their face value. Because a zero coupon bond does not pay current income,
its price can be very volatile when interest rates change. In calculating
its dividends the Fund takes into account as income a portion of the
difference between a zero coupon bond's purchase price and its face value.
Government Securities. Government securities may or may not be backed by
the full faith and credit of the U.S. government. U.S. Treasury bonds,
notes and bills and certain agency securities, such as those issued by the
Federal Housing Administration, are backed by the full faith and credit of
the U.S. government and are the highest quality government securities. The
Portfolio may also invest a substantial portion of its portfolio in
securities issued by government agencies or instrumentalities (such as
executive departments of the U.S. government or independent Federal
organizations supervised by Congress), which may have different degrees of
government backing but which are not backed by the full faith and credit of
the U.S. government. There is no guarantee that the government will support
these types of securities, and therefore they involve more risk than other
government obligations.
Mortgage Backed Securities. Mortgage backed securities are securities
representing interests in a pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to the investor. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower their total return. When a
mortgage in the underlying pool is prepaid, an unscheduled principal
prepayment is passed through to the investor. This principal is returned to
the investor at par. As a result, if a mortgage security were trading at a
premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of
the Federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Collateralized Mortgage Obligations ("CMOs"). CMOs are pay through
securities collateralized by mortgages or mortgage backed securities. CMOs
are issued in classes and series that have different maturities and often
are retired in sequence. CMOs may be issued by governmental or non
governmental entities such as banks and other mortgage lenders. Non
government securities may offer a higher yield but also may be subject to
greater price fluctuation than government securities.
Asset Backed Securities. Asset backed securities consist of undivided
fractional interests in pools of consumer loans (unrelated to mortgage
loans) held in a trust. Payments of principal and interest are passed
through to certificateholders and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited
guarantee or senior/subordination. The degree of credit enhancement varies,
but generally amounts to only a fraction of the asset backed security's par
value until exhausted. If the credit enhancement is exhausted,
certificateholders may experience losses or delays in payment if the
required payments of principal and interest are not made to the trust with
respect to the underlying loans. The value of these securities also may
change because of changes in the market's perception of the
creditworthiness of the servicing agent for the loan pool, the originator
of the loans or the financial institution providing the credit enhancement.
Asset backed securities are ultimately dependent upon payment of consumer
loans by individuals, and the certificateholder generally has no recourse
to the entity that originated the loans. The underlying loans are subject
to prepayments which shorten the securities' weighted average life and may
lower their return. As prepayments flow through at par, total returns would
be affected by the prepayments: if a security were trading at a premium,
its total return would be lowered by prepayments, and if a security were
trading at a discount, its total return would be increased by prepayments.
Foreign Investments. The Portfolio may invest in securities of foreign
issuers directly or in the form of American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs")
or other similar securities representing securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as
the securities they represent. Designed for use in U.S. and European
securities markets, respectively, ADRs, GDRs, and EDRs are alternatives to
the purchase of the underlying securities in their national markets and
currencies. but are subject to the same risks as the foreign securities to
which they relate.
With respect to certain countries in which capital markets are either less
developed or not easily accessed, investments by the Portfolio may be made
through investment in other investment companies that in turn are
authorized to invest in the securities of such countries. Investment in
other investment companies is limited in amount by the 1940 Act, will
involve the indirect payment of a portion of the expenses, including
advisory fees, of such other investment companies and may result in a
duplication of fees and expenses.
Options on Stocks. The Portfolio may write and purchase put and call
options on stocks. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying stock at the
exercise price at any time during the option period. Similarly, a put
option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying stock at the exercise price at any time
during the option period. A covered call option, which is a call option
with respect to which the Portfolio owns the underlying stock, sold by the
Portfolio exposes the Portfolio during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying stock or to possible continued holding of a stock which might
otherwise have been sold to protect against depreciation in the market
price of the stock. A covered put option sold by the Portfolio exposes the
Portfolio during the term of the option to a decline in price of the
underlying stock. A put option sold by the Portfolio is covered when, among
other things, cash or liquid securities are placed in a segregated account
to fulfill the obligations undertaken.
To close out a position when writing covered options, the Portfolio may
make a "closing purchase transaction," which involves purchasing an option
on the same stock with the same exercise price and expiration date as the
option which it has previously written on the stock. The Portfolio will
realize a profit or loss for a closing purchase transaction if the amount
paid to purchase an option is less or more, as the case may be, than the
amount received from the sale thereof. To close out a position as a
purchaser of an option, the Portfolio may make a "closing sale
transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased.
The Portfolio intends to treat over the counter options ("OTC Options")
purchased and the assets used to "cover" OTC Options written as not readily
marketable and therefore subject to the limitations described in
"Investment Restrictions" in the SAI.
Options on Stock Indices. The Portfolio may purchase and write put and call
options on stock indices listed on stock exchanges. A stock index
fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indices are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the fixed
exercise price of the option exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The
amount of cash received will be equal to such difference between the
closing price of the index and the exercise price of the option expressed
in dollars times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or the
option may expire unexercised.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indices, in an
industry or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by the Portfolio of options
on stock indices will be subject to Bankers Trust's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Futures Contracts on Securities Indices. The Portfolio may enter into
contracts providing for the making and acceptance of a cash settlement
based upon changes in the value of an index of securities ("futures
contracts"). This investment technique may be used to hedge against
anticipated future change in general market prices which otherwise might
either adversely affect the value of securities held by the Portfolio or
adversely affect the prices of securities which are intended to be
purchased at a later date for the Portfolio or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position.
When used for hedging purposes, a futures contract involves the
establishment of a position which will move in a direction opposite to that
of the investment being hedged. If these hedging transactions are
successful, the futures positions taken for the Portfolio will rise in
value by an amount which approximately offsets the decline in value of the
portion of the Portfolio's investments that are being hedged. Should
general market prices move in an unexpected manner, the full anticipated
benefits of futures contracts may not be achieved or a loss may be
realized.
Futures contracts do involve certain risks. These risks could include a
lack of correlation between the Futures Contract and the corresponding
securities market, a potential lack of liquidity in the secondary market
and incorrect assessments of market trends which may result in poorer
overall performance than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted
and maintained as a good faith deposit against performance of obligations
under futures contracts written for the Portfolio.
Options on Futures Contracts. The Portfolio may invest in options on such
futures contracts for similar purposes.
The Portfolio may not purchase or sell a futures contract or option thereon
if immediately thereafter its margin deposits on its outstanding futures
contracts (other than futures contracts entered into for bona fide hedging
purposes) and premiums paid for options thereon would exceed 5% of the
market value of the Portfolio's total assets.
Foreign Currency Exchange Transactions. Because the Portfolio buys and
sells securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the
U.S. dollar, the Portfolio from time to time may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar.
The Portfolio either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission.
Neither spot transactions nor forward foreign currency exchange contracts
eliminate fluctuations in the prices of the Portfolio's securities or in
foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long term investment decisions, the Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
Options on Foreign Currencies. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Portfolio may use options on currency to cross hedge, which
involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different, but related currency. As with
other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may be used to hedge
against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the
entire amount of the premium plus related transaction costs. In addition,
the Portfolio may purchase call options on currency when the Adviser
anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect
to covered options it has written, the Portfolio will not be able to sell
the underlying currency or dispose of assets held in a segregated account
until the options expire or are exercised. Similarly, if the Portfolio is
unable to effect a closing sale transaction with respect to options it has
purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of
underlying currency. The Portfolio pays brokerage commissions or spreads in
connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over the counter and involve liquidity and credit risks which
may not be present in the case of exchange traded currency options. The
Portfolio's ability to terminate over the counter options ("OTC options")
will be more limited than with exchange traded options. It is also possible
that broker dealers participating in OTC options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes
its position, the Portfolio will treat purchased OTC options and assets
used to cover written OTC options as illiquid securities. With respect to
options written with primary dealers in U.S. government securities pursuant
to an agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with reference
to the repurchase formula.
There can be no assurance that the use of these portfolio strategies will
be successful.
Asset Coverage. To reduce the leverage created by the Portfolio's use of
futures and related options, as well as when-issued and delayed delivery
securities and foreign currency exchange transactions, the Portfolio will
cover such transactions, as required under applicable interpretations of
the SEC, either by owning the underlying securities or by a segregating
with the Portfolio's custodian liquid securities in an amount at all times
equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
BT PYRAMID MUTUAL FUNDS
BT Institutional Asset Management Fund
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
New York, NY 10006
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
New York, NY 10006
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. This Prospectus does not
constitute an offer in any state in which, or to any person to whom, such
offer may not lawfully be made.
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 1997
Cusip #055847404
STA482300 (6/97)
BT PYRAMID MUTUAL FUNDS
BT Institutional Asset Management Fund
BT Pyramid Mutual Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each
having distinct investment objectives and policies. This Statement of
Additional Information relates only to the BT Institutional Asset
Management Fund (the "Fund"). The Fund seeks high total return with
reduced risk over the long term by allocating investments among stocks,
bonds and short-term instruments.
As described in the Prospectus, the Trust seeks to achieve the investment
objective of the Fund by investing all the investable assets of the Fund in
the Asset Management Portfolio, (the "Portfolio"), an open-end management
investment company having the same investment objective as the Fund.
Shares of the Fund are sold by Edgewood Services, Inc. (`Edgewood''), the
Trust's distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolio's
investment adviser (`Adviser''), and to clients and customers of other
organizations.
The Trust's Prospectus for the Fund is dated June 30, 1997, and provides
the basic information investors should know before investing. The
Prospectus may be obtained without charge by calling the Trust at the
telephone number listed below or by contacting any Service Agent. This
Statement of Additional Information, which is not a Prospectus, is intended
to provide additional information regarding the activities and operations
of the Trust and should be read in conjunction with the Prospectus.
Capitalized terms not otherwise defined in this Statement of Additional
Information have the meanings accorded to them in the Trust's Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
CLEARING OPERATIONS PITTSBURGH, PENNSYLVANIA 15230-0897(800) 368-4031
P.O. BOX 897
TABLE OF CONTENTS
Investment Objective and Policies..........................1
Performance Information....................................14
Valuation of Securities; Redemptions and Purchases in Kind.17
Management of the Trust and Portfolio......................18
Organization of the Trust..................................23
Taxation...................................................24
Financial Statements.......................................25
Appendix...................................................26
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is described in the Fund's Prospectus.
There can, of course, be no assurance that the Fund will achieve its
investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all of its
Assets in the Portfolio. The Trust may withdraw the Fund's investment from
the Portfolio at any time if the Board of Trustees of the Trust determines
that it is in the best interests of the Fund to do so.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio.
Certificates of Deposit and Bankers' Acceptances. Certificates of deposit
are receipts issued by a depository institution in exchange for the deposit
of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to
maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft drawn on
a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that,
in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary
market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note
(which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
For a description of commercial paper ratings, see the Appendix.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because
they have not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven calendar days.
Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven calendar days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting
in additional expenses and delay. Adverse market conditions could impede
such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend
on an efficient institutional market in which the unregistered security can
be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of
the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in the
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
Lending of Portfolio Securities. The Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations.
The Portfolio will not lend securities to Bankers Trust, Edgewood, or their
affiliates. By lending its securities, the Portfolio can increase its
income by continuing to receive interest on the loaned securities as well
as by either investing the cash collateral in short-term securities or
obtaining yield in the form of interest paid by the borrower when U.S.
government obligations are used as collateral. There may be risks of delay
in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest rises above
the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on
the loaned securities, and any increase in market value; (v) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and regain
the right to vote the securities.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the Adviser's
skill and experience with respect to such instruments and usually depends
on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits
of futures contracts or options on futures contracts or may realize losses
and thus will be in a worse position than if such strategies had not been
used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the
price of the securities and currencies hedged or used for cover will not be
perfect and could produce unanticipated losses.
Futures Contracts. The Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on financial indices including any index of
U.S. government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract
market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of
the contracts as between the clearing members of the exchange. The
Portfolio may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S.
government, such as long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-
backed securities and three-month U.S. Treasury Bills. The Portfolio may
also enter into futures contracts which are based on bonds issued by
entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit").
It is expected that the initial deposit would be approximately 1 1/2% to 5%
of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each
day the Portfolio would provide or receive cash that reflects any decline
or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Portfolio which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in interest or
foreign exchange rates without actually buying or selling fixed-income
securities or foreign currencies. For example, if interest rates were
expected to increase, the Portfolio might enter into futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling an equivalent value of the debt securities owned by the
Portfolio. If interest rates did increase, the value of the debt security
in the Portfolio would decline, but the value of the futures contracts to
the Portfolio would increase at approximately the same rate, thereby
keeping the net asset value of the Portfolio from declining as much as it
otherwise would have. The Portfolio could accomplish similar results by
selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt
securities, the Portfolio could take advantage of the anticipated rise in
the value of debt securities without actually buying them until the market
had stabilized. At that time, the futures contracts could be liquidated
and the Portfolio could then buy debt securities on the cash market. To
the extent the Portfolio enters into futures contracts for this purpose,
the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist
of cash, cash equivalents or high quality liquid debt securities from its
portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the
initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial
deposit and variation margin requirements. Rather than meeting additional
variation margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Portfolio, if the Adviser's
investment judgment about the general direction of interest rates is
incorrect, the Portfolio's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and
interest rates decrease instead, the Portfolio will lose part or all of the
benefit of the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it
may have to sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market. The Portfolio may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Portfolio may purchase and write options
on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based
or the price of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying debt securities.
As with the purchase of futures contracts, when the Portfolio is not fully
invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's holdings.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price
at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium which provides
a partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option the Portfolio has
written is exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Portfolio's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, the Portfolio may purchase a put option on a futures contract
to hedge its portfolio against the risk of rising interest rates.
The amount of risk the Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value
of the option purchased.
The Board of Trustees of the Portfolio has adopted a further restriction
that the Portfolio will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits
on all the futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts owned by the Portfolio (other than
those entered into for bona fide hedging purposes) would exceed 5% of the
market value of the total assets of the Portfolio.
Options on Foreign Currencies. The Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will
be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Portfolio may purchase put options
on the foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may purchase call options
thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of
other types of options, however, the benefit to the Portfolio deriving from
purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated,
the Portfolio could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits
of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline
in the dollar value of foreign currency denominated securities due to
adverse fluctuations in exchange rates it could, instead of purchasing a
put option, write a call option on the relevant currency. If the expected
decline occurs, the options will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the
Portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Portfolio would be
required to purchase or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Portfolio also may be required to forego all or
a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has
an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in
a segregated account by its Custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if
the Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash, U.S. government
securities and other high quality liquid debt securities in a segregated
account with its Custodian.
The Portfolio intends to write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change
in the exchange rate. In such circumstances, the Portfolio collateralizes
the option by maintaining in a segregated account with its custodian, cash
or U.S. government securities or other high quality liquid debt securities
in an amount not less than the value of the underlying foreign currency in
U.S. dollars priced daily.
Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by the
Portfolio in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions.
In particular, all foreign currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Portfolio to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such options must
be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which
may not be present in the case of exchange-traded currency options. The
Portfolio's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will
not fulfill their obligations. Until such time as the staff of the SEC
changes its position, the Portfolio will treat purchased over-the-counter
options and assets used to cover written over-the-counter options as
illiquid securities. With respect to options written with primary dealers
in U.S. government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities
may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and
(v) lesser trading volume.
Options on Securities. The Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, the Portfolio may forgo the
benefits of appreciation on securities sold or may pay more than the market
price on securities acquired pursuant to call and put options written by
the Portfolio.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified
in the option (the "exercise price") by exercising the option at any time
during the option period. If the option expires unexercised, the Portfolio
will realize income in an amount equal to the premium received for writing
the option. If the option is exercised, a decision over which the
Portfolio has no control, the Portfolio must sell the underlying security
to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security
above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at
the specified exercise price at any time during the option period. If the
option expires unexercised, the Portfolio will realize income in the amount
of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the
Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a covered put option, the Portfolio, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. The
Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration
date as the option previously written. This transaction is called a
"closing purchase transaction." Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage
commissions or dealer spreads in selling securities it receives or it may
be forced to hold underlying securities until an option is exercised or
expires.
When the Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to
reflect the current market value of the option written. The current market
value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the Portfolio enters into a
closing purchase transaction, the Portfolio will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option
will be eliminated. If a call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received.
The writing of covered call options may be deemed to involve the pledge of
the securities against which the option is being written. Securities
against which call options are written will be segregated on the books of
the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which
it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective
puts") or securities of the type in which it is permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held in the
Portfolio's portfolio, at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's portfolio securities. Put
options also may be purchased by the Portfolio for the purpose of
affirmatively benefiting from a decline in the price of securities which
the Portfolio does not own. The Portfolio would ordinarily recognize a
gain if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value
of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities
in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will develop or
continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present,
approximately ten broker-dealers, including several of the largest primary
dealers in U.S. government securities, make these markets. The ability to
terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the
issuing broker rather than an exchange, and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. To reduce this risk, the Portfolio will purchase such options
only from broker-dealers who are primary government securities dealers
recognized by the Federal Reserve Bank of New York and who agree to (and
are expected to be capable of) entering into closing transactions, although
there can be no guarantee that any such option will be liquidated at a
favorable price prior to expiration. The Adviser will monitor the
creditworthiness of dealers with whom the Portfolio enters into such
options transactions under the general supervision of the Portfolio's
Trustees.
Options on Securities Indices. In addition to options on securities, the
Portfolio may also purchase and write (sell) call and put options on
securities indices. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference
between the exercise price and the value of the index. Such options will
be used for the purposes described above under "Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although the Portfolio generally will only purchase or write such an option
if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included
in the index is interrupted. The Portfolio will not purchase such options
unless the Adviser believes the market is sufficiently developed such that
the risk of trading in such options is no greater than the risk of trading
in options on securities.
Price movements in the Portfolio's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options
on indices cannot serve as a complete hedge. Because options on securities
indices require settlement in cash, the Adviser may be forced to liquidate
portfolio securities to meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because the Portfolio buys
and sells securities denominated in currencies other than the U.S. dollar
and receives interest, dividends and sale proceeds in currencies other than
the U.S. dollar, the Portfolio from time to time may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar.
The Portfolio either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally
has no deposit requirement and is traded at a net price without commission.
The Portfolio maintains with its custodian a segregated account of high
grade liquid assets in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions
nor forward foreign currency exchange contracts eliminate fluctuations in
the prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, the Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the manner
set forth in the Prospectus may be restricted. Forward contracts may
reduce the potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio
than if it had not entered into such contracts. The use of foreign
currency forward contracts may not eliminate fluctuations in the underlying
U.S. dollar equivalent value of the prices of or rates of return on the
Portfolio's foreign currency denominated portfolio securities and the use
of such techniques will subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to the Portfolio's use of cross-hedges, there
can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's cross-
hedges and the movements in the exchange rates of the foreign currencies in
which the Portfolio's assets that are the subject of such cross-hedges are
denominated.
Rating Services
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, Bankers Trust also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event would require the Portfolio to eliminate the
obligation from its portfolio, but Bankers Trust will consider such an
event in its determination of whether the Portfolio should continue to hold
the obligation. A description of the ratings used herein and in the Fund's
Prospectus is set forth in the Appendix to this Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of the
Fund and the Portfolio and may not be changed with respect to the Fund or
the Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of
the outstanding voting securities" under the Investment Company Act of
1940, as amended (the "1940 Act"), and as used in this Statement of
Additional Information and the Prospectus, means, with respect to the Fund
(or the Portfolio), the lesser of (i) 67% or more of the outstanding voting
securities of the Fund (or of the total beneficial interests of the
Portfolio) present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund or of the total beneficial
interests of the Portfolio) are present or represented by proxy or (ii)
more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio). Whenever the Trust is
requested to vote on a fundamental policy of the Portfolio, the Trust will
hold a meeting of the Fund's shareholders and will cast its vote as
instructed by that Fund's shareholders.
As a matter of fundamental policy, the Portfolio (or the Fund) may not
(except that no investment restriction of the Fund shall prevent the Fund
from investing all of its Assets in an open-end investment company with
substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current
value of the Portfolio's (Fund's) assets, it may borrow money as a
temporary measure for extraordinary or emergency purposes and enter
into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3
of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio securities
or to maintain liquidity in the event of an unanticipated failure to
complete a portfolio security transaction or other similar situations)
or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge
of assets for purposes of this restriction and except that assets may
be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions, see
clause (i) under the caption "Additional Restrictions" below (as an
operating policy, the Portfolio may not engage in dollar roll
transactions);
(2) underwrite securities issued by other persons except insofar as the
Portfolio (Trust or the Fund) may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken
at market value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a portion of
an issue of debt securities of types distributed publicly or
privately;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course
of business (except that the Portfolio (Trust) may hold and sell, for
the Portfolio's (Fund's) portfolio, real estate acquired as a result
of the Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the
achievement of the Portfolio's (Fund's) investment objective, up to
25% of its total assets may be invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
Additional Restrictions. In order to comply with certain statutes and
policies the Portfolio (or the Trust, on behalf of the Fund) will not as a
matter of operating policy (except that no operating policy shall prevent
the Fund from investing all of its Assets in an open-end investment company
with substantially the same investment objective):
(i) borrow money (including through reverse repurchase or dollar roll
transactions) for any purpose in excess of 5% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 1/3 of its
total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's (Fund's) total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
and reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell securities it does not own such that the dollar amount of
such short sales at any one time exceeds 25% of the net equity of the
Portfolio (Fund), and the value of securities of any one issuer in
which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the
value of the Portfolio's (Fund's) net assets or 2.0% of the securities
of any class of any U.S. issuer and, provided that short sales may be
made only in those securities which are fully listed on a national
securities exchange or a foreign exchange (This provision does not
include the sale of securities of the Portfolio (Fund)
contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold, i.e., short sales against
the box.) (The Portfolio (Fund) has no current intention to engage in
short selling.);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time
thereof would cause (a) more than 10% of the Portfolio's (Fund's)
total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the
Portfolio's (Fund's) total assets (taken at the greater of cost or
market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer
to be held for the Portfolio (Fund) unless permitted to exceed these
limitations by an exemptive order of the SEC; provided further that,
except in the case of merger or consolidation, the Portfolio (Fund)
shall not purchase any securities of any open-end investment company
unless the Portfolio (Fund) (1) waives the investment advisory fee
with respect to assets invested in other open-end investment companies
and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in securities
(excluding Rule 144A securities) that are restricted as to resale
under the 1933 Act (other than Rule 144A securities deemed liquid by
the Portfolio's (Fund's) Board of Trustees);
(viii) invest more than 15% of the Portfolio's (Fund's) net assets
(taken at the greater of cost or market value) in securities that are
illiquid or not readily marketable excluding (a) Rule 144A securities
that have been determined to be liquid by the Board of Trustees; and
(b) commercial paper that is sold under section 4(2) of the 1933 Act
which: (i) is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest categories by
at least two nationally recognized statistical rating organizations
and the Portfolio's (Fund's) Board of Trustees have determined the
commercial paper to be liquid; or (iii) is rated in one of the two
highest categories by one nationally recognized statistical rating
agency and the Portfolio's (Fund's) Board of Trustees has determined
that the commercial paper is of equivalent quality and is liquid;
(ix) with respect to 75% of the Portfolio's (Fund's) total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio (Fund) to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(x) if the Portfolio (Fund) is a "diversified" fund with respect to 75% of
its assets, invest more than 5% of its total assets in the securities
(excluding U.S. government securities) of any one issuer;
(xi) invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Portfolio (Trust), or is an officer or partner of the Adviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(xii) invest in warrants (other than warrants acquired by the Portfolio
(Fund) as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of
cost or market) would exceed 5% of the value of the Portfolio's
(Fund's) net assets or if, as a result, more than 2% of the
Portfolio's (Fund's) net assets would be invested in warrants not
listed on a recognized United States or foreign stock exchange, to the
extent permitted by applicable state securities laws;
(xiii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the option
is issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities
or commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 50% of the Portfolio's (Fund's) net assets; (c) the
securities subject to the exercise of the call written by the
Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the
call is sold and must continue to be owned by the Portfolio (Fund)
until the call has been exercised, has lapsed, or the Portfolio (Fund)
has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio (Fund) establishes a segregated account with
its custodian consisting of cash or short-term U.S. government
securities equal in value to the amount the Portfolio (Fund) will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
(Fund) has purchased a closing put, which is a put of the same series
as the one previously written); and
(xiv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons
and: (a) the options or futures are offered through the facilities of
a national securities association or are listed on a national
securities or commodities exchange, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such
options which are held at any time do not exceed 20% of the
Portfolio's (Fund's) total net assets; and (c) the aggregate margin
deposits required on all such futures or options thereon held at any
time do not exceed 5% of the Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other
later change.
The Fund will comply with the state securities laws and regulations of all
states in which it is registered. The Portfolio will comply with the
permitted investments and investment limitations in the securities laws and
regulations of all states in which the Fund, or any registered investment
company investing in the Portfolio is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions on
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or
futures commission merchant, including to the extent and in the manner
permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf
of the Portfolio are frequently placed by the Adviser with the issuer or a
primary or secondary market-maker for these securities on a net basis,
without any brokerage commission being paid by the Portfolio. Trading
does, however, involve transaction costs. Transactions with dealers
serving as market-makers reflect the spread between the bid and asked
prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities. Purchases
of underwritten issues may be made which will include an underwriting fee
paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others.
The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for
the Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research,
market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Portfolio may determine, the Adviser may consider sales
of shares of the Trust and of other investment company clients of Bankers
Trust as a factor in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if commissions are
comparable to those charged by nonaffiliated, qualified broker-dealers for
similar services.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. Bankers Trust may use this research
information in managing the Portfolio's assets, as well as the assets of
other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Portfolio and to the Adviser, it is the
opinion of the management of the Portfolio that such information is only
supplementary to the Adviser's own research effort, since the information
must still be analyzed, weighed and reviewed by the Adviser's staff. Such
information may be useful to the Adviser in providing services to clients
other than the Portfolio, and not all such information is used by the
Adviser in connection with the Portfolio. Conversely, such information
provided to the Adviser by brokers and dealers through whom other clients
of the Adviser effect securities transactions may be useful to the Adviser
in providing services to the Portfolio.
In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of the Adviser's other clients.
Investment decisions for the Portfolio and for the Adviser's other clients
are made with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized
that in some cases this system could have a detrimental effect on the price
or volume of the security as far as the Portfolio is concerned. However,
it is believed that the ability of the Portfolio to participate in volume
transactions will produce better executions for the Portfolio.
For the fiscal years ended March 31, 1997, 1996, and 1995, the Portfolio
paid brokerage commissions in the amount of $193,354, $132,995, and
$118,748, respectively.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
YIELD: Yields for the Fund used in advertising are computed by dividing
the Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the Fund's
net asset value per share at the end of the period, and annualizing the
result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purpose of yield quotations in
accordance with standardized methods applicable to all stock and bond
mutual funds. Dividends from equity investments are treated as if they
were accrued on a daily basis, solely for the purpose of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to
bonds trading at a discount by adding a portion of the discount to daily
income. Capital gains and losses generally are excluded from the
calculation.
Income calculated for the purposes of calculating the Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for the Fund may differ from the
rate of distributions of the Fund paid over the same period or the rate of
income reported in the Fund's financial statements.
The Fund's 30- day SEC yield for the period ended March 31, 1997 was 3.29%.
Total return: The Fund's average annual total return will be calculated
for certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made at
the maximum public offering price with all distributions reinvested) to
reach the value of that investment at the end of the periods. The Fund may
also calculate total return figures which represent aggregate performance
over a period or year-by-year performance.
For the fiscal year ended March 31, 1997, and for the period from September
16, 1993 (commencement of operations) to March 31, 1997, the average annual
total returns for the Fund were 14.31%, and 10.38% (annualized),
respectively.
Performance Results: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the Fund
in the future since the net asset value and public offering price of shares
of the Fund will vary based not only on the type, quality and maturities of
the securities held in the Portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund and the
Portfolio. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total return
of the Fund to total returns published for other investment companies or
other investment vehicles. Total return reflects the performance of both
principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments
is valid only if performance is calculated in the same manner. Since there
are different methods of calculating performance, investors should consider
the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs. Evaluations of
the Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for the Fund's performance
information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Business Daily, a daily newspaper that features financial,
economic and business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund
research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000
mutual funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take form of commentary on these
developments by Fund portfolio managers and their views and analysis on how
such developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the
mutual fund industry, including the growth of the industry, from sources
such as the Investment Company Institute (`ICI''). For example, according
to the ICI, thirty-seven percent of American households are pursuing their
financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the more
than 6,000 funds available.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing
in 60 days or less), including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by the Portfolio's Board of
Trustees. It is generally agreed that securities for which market
quotations are not readily available should not be valued at the same value
as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release
No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which
concludes that there is "no automatic formula" for calculating the value of
restricted securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation. According to
FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Portfolio purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Adviser of the Portfolio will value such securities based upon all relevant
factors as outlined in FRR 1.
The Trust, on behalf of the Fund, and the Portfolio reserve the right, if
conditions exist which make cash payments undesirable, to honor any request
for redemption or repurchase order by making payment in whole or in part in
readily marketable securities chosen by the Trust, or the Portfolio, as the
case may be, and valued as they are for purposes of computing the Fund's or
the Portfolio's net asset value, as the case may be (a redemption in kind).
If payment is made to a Fund shareholder in securities, an investor,
including the Fund, may incur transaction expenses in converting these
securities into cash. The Trust, on behalf of the Fund, and the Portfolio
have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund and the Portfolio are obligated to redeem shares
or beneficial interests, as the case may be, with respect to any one
investor during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund or the Portfolio, as the
case may be, at the beginning of the period.
The Portfolio has agreed to make a redemption in kind to the Fund whenever
the Fund wishes to make redemption in kind and therefore shareholders of
the Fund that receive redemptions in kind will receive portfolio securities
of such Portfolio, and in no case will they receive a security issued by
the Portfolio. The Portfolio has advised the Trust that the Portfolio will
not redeem in kind except in circumstances in which the Fund is permitted
to redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce
its investment in the Portfolio on each day the Portfolio determines its
net asset value. At the close of each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage,
effective for that day, which represents that investor's share of the
aggregate beneficial interests in the Portfolio. Any additions or
withdrawals which are to be effected as of the close of business on that
day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of business on
such day plus or minus, as the case may be, the amount of net additions to
or withdrawals from the investor's investment in the Portfolio effected as
of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Portfolio as of the close of business
on such day plus or minus, as the case may be, the amount of net additions
to or withdrawals from the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio
as the close of business on the following business day.
The Fund may, at its own option, accept securities in payment for shares.
The securities delivered in payment for shares are valued by the method
described under "Net Asset Value" as of the day the Fund receives the
securities. This is a taxable transaction to the shareholder. Securities
may be accepted in payment for shares only if they are, in the judgment of
Bankers Trust, appropriate investments for the Fund's Portfolio. In
addition, securities accepted in payment for shares must: (i) meet the
investment objective and policies of the acquiring Fund's Portfolio;
(ii) be acquired by the applicable Fund for investment and not for resale
(other than for resale to the Fund's Portfolio); (iii) be liquid securities
which are not restricted as to transfer either by law or liquidity of
market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, over-the-counter market or by
readily available market quotations from a dealer in such securities. The
Fund reserves the right to accept or reject at its own option any and all
securities offered in payment for its shares.
MANAGEMENT OF THE TRUST AND PORTFOLIO
The Trustees and officers of the Trust and Portfolio, their birthdates, and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless otherwise
indicated, the address of each officer is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania, 15230-0897. An asterisk indicates that
Trustee who is an `interested person'' (as defined in the 1940 Act) of
either the Trust or the Portfolio.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE (birthdate: September 2, 1951) - President and Trustee;
Chairman, Chief Executive Officer and President, Signature Financial Group,
Inc. ("SFG") (since December, 1988) and Signature (since April, 1989). His
address is 6 St. James Avenue, Boston, Massachusetts 02116.
MARTIN J. GRUBER (birthdate: July 15, 1937) - Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School
of Business, New York University (since 1964). His address is 229 S. Irving
Street, Ridgewood, New Jersey 07450.
KELVIN J. LANCASTER (birthdate: December 10, 1924) - Trustee; Professor,
Department of Economics, Columbia University. His address is 35 Claremont
Avenue, New York, New York 10027.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) - Trustee; Director,
Canada Life Insurance Company of New York; Director, Competitive
Technologies, Inc., a public company listed on the American Stock Exchange;
Retired (since 1987); Corporate Vice President, Newmont Mining Corporation
(prior to 1987). His address is 6581 Ridgewood Drive, Naples, FL 33963.
TRUSTEES OF THE PORTFOLIO
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions
of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE (birthdate: September 2, 1951) - Trustee and President;
Chairman, Chief Executive Officer and President, SFG (since December, 1988)
and Signature (since April, 1989). His address is 6 St. James Avenue,
Boston, Massachusetts 02116.
S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired; Director,
Coutts Group; Coutts (U.S.A.) International; Coutts Trust Holdings, Ltd;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee; Principal,
Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services,
John Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen
Road, Weston, Massachusetts 02193.
OFFICERS OF THE TRUST AND PORTFOLIO
Unless otherwise specified, each officer listed below holds the same
position with the Trust and the Portfolio.
RONALD M. PETNUCH (birthdate: February 27, 1960) - President and Treasurer;
Senior Vice President, Federated Services Company (`FSC''); formerly,
Director of Proprietary Client Services, Federated Administrative Services
(`FAS''), and Associate Corporate Counsel, Federated Investors (``FI'').
CHARLES L. DAVIS, JR. (birthdate: March 23, 1960) - Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (birthdate: April 22, 1950) - Secretary; Corporate Counsel,
FI.
Messrs. Coolidge, Petnuch, Davis, and Neuman also hold similar positions
for other investment companies for which Signature, or Edgewood,
respectively, or an affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust or the Portfolio. No director, officer or employee of
Edgewood or any of its affiliates will receive any compensation from the
Trust or the Portfolio for serving as an officer or Trustee of the Trust or
the Portfolio.
TRUSTEE COMPENSATION TABLE
NAME, AGGREGATE TOTAL
POSITION WITH COMPENSATION COMPENSATION FROM
TRUST/PORTFOLIO FROM TRUST* FUND COMPLEX+**
Harry Van Benschoten,
Trustee of Trust $12,500 $27,500
Philip W. Coolidge
Trustee of the Trust $400 $1,250
and Portfolio
Martin J. Gruber,
Trustee of Trust $12,500 $27,500
Kelvin J. Lancaster,
Trustee of Trust $12,500 $26,250
Charles P. Biggar,
Trustee of Portfolio $725 $28,750
S. Leland Dill,
Trustee of Portfolio $725 $28,750
Philip Saunders, Jr.,
Trustee of Portfolio $725 $28,750
* Information is furnished for the fiscal year ended March 31, 1997.
+ Information is provided for the last calendar year.
** Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds,
BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, International Equity Portfolio, Utility
Portfolio, Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio.
Bankers Trust reimbursed the Fund and the Portfolio for a portion of their
Trustees fees for the period above. See "Investment Adviser" and
"Administrator" herein.
As of May 28, 1997, the Trustees and officers of the Trust and the
Portfolio owned in the aggregate less than 1% of the shares of the Fund or
the Trust (all series taken together).
As of May 28, 1997, the following shareholders of record owned 5% or more
of the outstanding shares of BT Institutional Asset Management Fund:
Bankers Trust Company as custodian for Kraft Thrift Plan, Jersey City, New
Jersey, owned approximately 7,529,593 shares (32.85%); Bankers Trust
Company as custodian for Philip Morris Inc., Jersey City, New Jersey, owned
approximately 5,025,014 shares (21.92%); Northern Telecom c/o Bankers Trust
Company, Jersey City, New Jersey, owned approximately 4,104,026 shares
(17.90%); and Bankers Trust Company as custodian for 401(k) Matsushita
Electric Corp. of America, Jersey City, New Jersey, owned approximately
1,160,564 shares (5.06%).
INVESTMENT ADVISER
Under the terms of the Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees
of the Portfolio. Bankers Trust will: (i) act in strict conformity with
the Portfolio's Declaration of Trust, the 1940 Act and the Investment
Advisers Act of 1940, as the same may from time to time be amended; (ii)
manage the Portfolio in accordance with the Portfolio's investment
objective, restrictions and policies; (iii) make investment decisions for
the Portfolio; and (iv) place purchase and sale orders for securities and
other financial instruments on behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Trust and the Portfolio bears
certain other expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or the Portfolio who are not officers, directors or employees of
Bankers Trust, Edgewood or any of their affiliates; SEC fees and state Blue
Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports and
meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the fiscal years ended March 31, 1997, 1996, and 1995, Bankers Trust
earned $1,882,677, $1,092,488, and $576,146, respectively for compensation
of investment advisory services provided to the Portfolio. For the same
periods, Bankers Trust reimbursed $462,108, $279,200, and $169,159,
respectively, to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on
behalf of the Portfolio, including outstanding loans to such issuers which
could be repaid in whole or in part with the proceeds of securities so
purchased. Such affiliates deal, trade and invest for their own accounts
in such obligations and are among the leading dealers of various types of
such obligations. Bankers Trust has informed the Portfolio that, in making
its investment decisions, it does not obtain or use material inside
information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Portfolio,
Bankers Trust will not inquire or take into consideration whether an issuer
of securities proposed for purchase or sale by the Portfolio is a customer
of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities
of such customers are held by any fund managed by Bankers Trust or any such
affiliate.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees, including
waivers thereof. Bankers Trust may not recoup any of its waived investment
advisory or administration and services fees. Such waivers by Bankers
Trust shall stay in effect for at least 12 months.
ADMINISTRATOR
Under administration and services agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Trust and the Portfolio reasonably deem necessary for the
proper administration of the Trust or the Portfolio. Bankers Trust will
generally assist in all aspects of the Fund's and Portfolio's operations;
supply and maintain office facilities (which may be in Bankers Trust's own
offices), statistical and research data, data processing services,
clerical, accounting, bookkeeping and recordkeeping services (including
without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained
by other agents), internal auditing, executive and administrative services,
and stationery and office supplies; prepare reports to shareholders or
investors; prepare and file tax returns; supply financial information and
supporting data for reports to and filings with the SEC and various state
Blue Sky authorities; supply supporting documentation for meetings of the
Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others to supply
services.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement") FSC performs such sub-administration duties for the Trust and
the Portfolio as from time to time may be agreed upon by Bankers Trust and
FSC. The Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers
Trust. All such compensation will be paid by Bankers Trust.
For the fiscal years ended March 31, 1997, 1996, and 1995, Bankers Trust
earned $333,419, $197,633, and $116,829, respectively, in compensation for
administrative and other services provided to the Fund. During the same
periods, Bankers Trust reimbursed $442,962, $285,469, and $189,016,
respectively, to the Fund to cover expenses.
For the fiscal years ended March 31, 1997, 1996, and 1995, Bankers Trust
earned $289,643, $168,075, and $88,638, respectively, in compensation for
administrative and other services provided to the Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses
of the Fund and the Portfolio (including fees pursuant to the investment
advisory agreement, but excluding interest, taxes, brokerage and, if
permitted by the relevant state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over the Fund, Bankers Trust will reimburse the Fund for the excess expense
to the extent required by state law. As of the date of this Statement of
Additional Information, the most restrictive annual expense limitation
applicable to any Fund is 2.5% of the Fund's first $30 million of average
annual net assets, 2.0% of the next $70 million of average annual net
assets and 1.5% of the remaining average annual net assets.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trust and for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Fund's
and the Portfolio's assets. Bankers Trust also serves as transfer agent of
the Trust and of the Portfolio pursuant to the respective administration
and services agreement. Under its transfer agency agreement with the
Trust, Bankers Trust maintains the shareholder account records for the
Fund, handles certain communications between shareholders and the Trust and
causes to be distributed any dividends and distributions payable by the
Trust. Bankers Trust may be reimbursed by the Fund or the Portfolio for
its out-of-pocket expenses. Bankers Trust will comply with the self-
custodian provisions of Rule 17f-2 under the 1940 Act.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment adviser
to the Portfolio. The Trust has acknowledged that the term "BT" is used by
and is a property right of certain subsidiaries of Bankers Trust and that
those subsidiaries and/or Bankers Trust may at any time permit others to
use that term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were
to occur, the Trustees would select an appropriate new name for the Trust,
but there would be no other material effect on the Trust, its shareholders
or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion Bankers
Trust may perform the services for the Portfolio contemplated by the
investment advisory agreement and other activities for the Fund and the
Portfolio described in the Prospectus and this Statement of Additional
Information without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. However, counsel has pointed out that future
changes in either Federal or state statutes and regulations concerning the
permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trust and the Portfolio.
State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to
register as dealers pursuant to state securities law. If the circumstances
described above should change, the Boards of Trustees would review the
relationships with Bankers Trust and consider taking all actions necessary
in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022-4669, serves as Counsel to the Trust and the
Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas
City, Missouri 64105 have been selected as Independent Accountants for the
Trust and the Portfolio.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund,
except with respect to the election of Trustees and the ratification of the
selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of this
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or a Trustee. The Declaration of Trust
provides for indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations, a possibility that
the Trust believes is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on February 28, 1992.
Whenever the Trust is requested to vote on a matter pertaining to the
Portfolio, the Trust will vote its shares without a meeting of Fund
shareholders if the proposal, if made with respect to the Fund, would not
require the vote of Fund shareholders as long as such action is permissible
under applicable statutory and regulatory requirements. The Trust will
hold a meeting of Fund shareholders for all other matters requiring a vote,
and the Trust will cast all of its votes at the meeting of investors in a
Portfolio in the same proportion as the votes of the Fund shareholders.
Other investors with a greater pro rata ownership of the Portfolio could
have effective voting control of the operations of the Portfolio.
TAXATION
TAXATION OF THE FUND
The Trust intends to qualify annually and to elect the Fund to be treated
as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund
intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gains and
therefore does not anticipate incurring a Federal income tax liability.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions of net
capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held
the Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such
share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
Federal tax status of distributions. Shareholders should consult their own
tax adviser concerning the application of Federal, state and local taxes to
the distributions they receive from the Fund.
TAXATION OF THE PORTFOLIO
The Portfolio is not subject to the Federal income taxation. Instead, the
Fund and other investors investing in the Portfolio must take into account,
in computing their Federal income tax liability, their share of the
Portfolio's income, gains, losses, deductions, credits and tax preference
items, without regard to whether they have received any cash distributions
from the Portfolio.
FOREIGN WITHHOLDING TAXES
Income received by the Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. Federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally
are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in the Fund
may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in the Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current
law, neither the Trust nor the Fund is liable for any income or franchise
tax in the Commonwealth of Massachusetts, provided that the Fund continues
to qualify as a regulated investment company under Subchapter M of the
Code.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts.
FINANCIAL STATEMENTS
The financial statements for the Fund and the Portfolio for the fiscal year
ended March 31, 1997, are incorporated herein by reference to the Annual
Report to shareholders of the Fund dated March, 1997 (File Nos. 33-45973
and 811-06576). A copy of the Annual Report may be obtained without charge
by contacting the Fund.
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of ratings which represent opinions as to
the quality of the securities. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of
quality.
MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear somewhat
larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
61
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
62
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
MOODY'S INVESTORS SERVICE, INC.'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of one year.
Issuers rated PRIME-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-
1 repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
63
Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP'S CORPORATE BOND RATINGS
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
64
in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
65
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
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if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NY: Bonds may lack a S&P's rating because no public rating has been
requested, because there is insufficient information on which to base a
rating, or because S&P's does not rate a particular type of obligation as a
matter of policy.
STANDARD & POOR'S RATINGS GROUP'S COMMERCIAL PAPER RATINGS
A: S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1 ".
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A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
INVESTMENT GRADE
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
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circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
HIGH YIELD GRADE
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
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DDD, DD, AND D: Bonds are in default of interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a
credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
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F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1+" and "F-1 " categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
DUFF & PHELPS BOND RATINGS
INVESTMENT GRADE
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AND AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A+, A, AND A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, AND BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
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HIGH YIELD GRADE
BB+, BB, AND BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+, B, AND B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
Preferred stocks are rated on the same scale as bonds but the preferred
rating gives weight to its more junior position in the capital structure.
Structured financings are also rated on this scale.
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DUFF & PHELPS PAPER/CERTIFICATES OF DEPOSIT RATINGS
CATEGORY 1: TOP GRADE
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors
are very small.
CATEGORY 2: GOOD GRADE
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
CATEGORY 3: SATISFACTORY GRADE
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DUFF 3: Satisfactory liquidity and other protection factors qualify issue
as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless timely payment is expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
* * * * *
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks
of lower-rated bonds. The Fund is dependent on the investment adviser's or
investment sub-adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
NOTE:
1 The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for
the securities listed. Ratings are generally given to securities at the
time of issuance. While the rating agencies may from time to time
revise such ratings, they undertake no obligation to do so, and the
ratings indicated do not necessarily represent ratings which would be
given to these securities on the date of the Fund's fiscal year end.
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INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, its
Statement of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. Neither the Prospectus nor this
Statement of Additional Information constitutes an offer in any state in
which, or to any person to whom, such offer may not lawfully be made.
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Cusip #055847404
SAI482 (6/97)
